Tag: British Pound

Fundamentals of the British Pound

Post author By Forex Academy
Post date 26 January, 2021
No Comments on Fundamentals of the British Pound

The British pound, whose use spans across more than 5000 years, is the oldest currency in the world. Originating from continental Europe under the Roman era, the official currency of the today’s United Kingdom was once also a unit of currency in Anglo-Saxon England, equivalent to 1 pound weight of silver, dating back to as […]

The symbol £ comes from an ornate L in Libra, whereas the ISO code under which it is recognized globally is GPB. Unlike other currencies, the GBP has endured such a vast portion of history and now tells a tale of how a currency once set the grounds for the future. In 928, the first King of England, Athelstan, adopted sterling as the first national currency, and one unit of the currency could actually buy off 15 heads of cattle. The name sterling, however, came to use only after the Norman Conquest, initially referring only to pennies and not pounds. This anterior name is of vague origin due to its connections to esterlin, a Norman word for little star, and lesterling, an Arab word meaning money.

In the late 1600s, upon suffering naval defeat in the Battle of Beachy Head, King William III established the Bank of England to fund the war with France. As the first central bank ever created, the Bank of England and the British helped create laws and principles which are today considered essential for regulating currencies. In 1717, for the first time in history, the country defined the currency’s value in terms of gold rather than silver, and the gold price of £4.25 per fine ounce set by Sir Isaac Newton lasted throughout most of the following two hundred years.

The country first adopted the gold standard in the 1800s, supporting the idea that the nation should back up its currency with an equivalent quantity of gold reserves. The United Kingdom briefly left the gold standard in 1914 to support itself during the war, yet the heavy borrowing led to high inflation that considerably devalued the pound. In 1925, Winston Churchill returned to the gold standard only to come off of it a few years later, in 1931, when the sterling once again underwent a significant drop. The 20th century gave birth to another nickname of the GDP, the cable, due to the creation of the first trans-Atlantic telecommunications cable used for stock exchanges between New York City and London. The term became part of today’s vernacular to the extent that the phrase what’s the quote on the cable is understood easily as the interest in knowing how many dollars are needed to buy pounds.

Overall, the British pound holds so much history and truly embodies the qualities of an enduring currency. The British were the first to put together a stable government and currency, which remained a safe haven for hundreds of years. Nowadays, the GBP has lost its previous value and power as it stands approximately third in reserves, right behind the USD and the EUR. The 2016 Brexit led to one of the worst falls of the GBP in history and the attempts to foretell the future of this once great currency seem more challenging than ever before.

The Bank of England

Under the rule of King William and Queen Mary, upon the issuance of the 1694 Royal Charter, the Bank of England was founded in the hope of promoting stability and providing benefits to the people, which are still held as dominant values of the institution. As one of the longest central banks in its entire existence, created right after the Swedish Riksbank, the Bank of England (BoE) served as a model for other central banks around the world. Today the bank’s responsibilities include the issuance of banknotes, control of the country’s gold reserves, and setting the official interest rates. The BoE has a dual mandate consisting of two main objectives – monetary stability and economic stability. The former involves influencing interest rates so as to deliver the objectives of the Monetary Policy Committee (MPC), whereas the latter entails ensuring liquidity, together aimed at promoting growth and employment in the British economy.

While the Bank of England bears the responsibility for printing money, it only includes the territory of the United Kingdom, while Ireland, which uses the EUR, is exempt from its authority. What is more, the BoE issues notes in both England and Wales, but Scotland and Northern Ireland can also do the same through several other banks. Coins are, however, manufactured by the Royal Mint, an export mint located in Llantrisant, South Wales. Since its opening by the Queen in 1968, the Royal Mint has been in charge of making and distributing the United Kingdom coins and supplying blanks and official medals. This government-owned institution now makes coins and medals for approximately 60 countries a year.

Another important segment of the bank involves the Monetary Policy Committee (MPC) that consists of nine members – the Governor, the three Deputy Governors for Monetary Policy, Financial Stability and Markets and Banking, the Chief Economist, and four external members appointed directly by the Chancellor. These members are selected based on their expert knowledge of economics and monetary policy in order to decide on the best monetary policy action for the Bank of England to keep inflation low and stable. As of March 16, 2020, Andrew Bailey is the Governor, replacing Mark Carney. The new Governor was said to be the favorite choice in a number of media due to his extensive experience in the field of banking and, in particular, previous responsibilities and successes at the Bank of England.

Some say that the BoE has been the main pillar of support of the United Kingdom during the past crises. The country’s economy is believed to fall into crisis approximately every 70 years and some past events, such as the Great Fire of London or the aftermath of the tea hegemony collapse, can support this viewpoint. It appears that every time the economy collapses the Bank of England steps in to provide support and safeguard the country and the currency against complete destruction. The Bank of England now has another task of helping the UK’s economy withstand the outcomes of Brexit-related decisions, which will be discussed later in the text, as one of the strongest factors impacting the country in the past few years.

UK Economic Reports

GDP Report

The GDP reports come out in three stages: the initial, the actual, and the final. Similar to the US GDP reports, the preliminary estimate is the most relevant piece of information as it first produces insight into the country’s economy. At the same time, this initial GDP report is also the least accurate, which is why the data is then revised in the following two reports. The current data shows how GDP is estimated to have fallen by a record of 20.4% in Quarter 2 (April to June), which was the second quarterly decline in a row after falling by 2.2% in the first quarter (January to March) this year. Despite the poor performance in the second quarter, the UK’s economy did see some improvement in June upon the easing of governmental decisions on lockdown (see the chart below). Currently seen as the worst in all G-7 states, the country’s GDP is estimated to fall by 8.3% in 2020, with a 6% annual growth rate anticipated in 2021. The UK’s economy is believed to rely heavily on social outdoor activities and the implications of the pandemic and related decisions can already be felt, as seen from the latest GDP report.

Claimant Count Change

Claimant Count Change is a monthly report that provides information on the employment changes upon measuring the number of unemployed people in the UK during the reported month. It is interesting to note how the Claimant Count Change averaged 3.70 thousand between 1971 and 2020, reaching an all-time high of 858.10 thousand in April of this year. The last report issued on August 11, 2020, signaled weakness in the labor market, with the number of people claiming unemployment benefits having gone up by 94.4 thousand to 2.7 million in the previous month.

Inflation/Monetary Policy Reports

The quarterly Inflation Reports comprise the Monetary Policy Committee’s economic analyses and inflation forecasts that are further utilized in making interest rate decisions. As of November 2019, the Inflation Report is called the Monetary Policy Report, yet its purpose has remained the same. The last Monetary Policy Report that came out on August 6, 2020, reported the impact of the COVID-19 pandemic on reducing jobs and incomes in the country. The report includes information on the assistance provided by the Bank of England to UK citizens. Moreover, the Monetary Policy Report states where the economy is in comparison to the overall monetary policy of the BoE. The Bank of England has already put effort into returning inflation to the 2% target which aligns with its 1989—2020 average of 2.53%. Inflation is considered as one of the key indicators used in trading in the spot forex market. Traders are generally advised to keep informed in order to understand the situation in the country at the time for trading.

Retail Sales

The Retail Sales report is an in-depth analysis of the latest macroeconomic and consumer trends affecting the UK retail industry. The last report issued in June 2020 indicated a 13.9% retail sales increase, which marks the second monthly increase in a row, resulting from the early economy recovery stages from the effects of the pandemic. Quite interestingly, while the United Kingdom’s retail sales averaged 0.23% between 1996 and 2020, they reached their all-time high of 13.90% in June 2020 and a record low of -18% in April of the same year. The next release of the report will be issued on August 21, which should give more information on whether the previous two-month increases will continue, further maintaining total sales to the pre-pandemic levels.

Manufacturing Report

Deemed the most vital indicator for the UK manufacturing industry, the Manufacturing Report reveals the manufacturers’ contribution to the country’s regions with regards to past 12-month output, jobs, investment, and business confidence and export. Over the last year, the UK has been largely affected by the attempts to leave the European Union and the impact of the COVID-19 pandemic, which have caused prolonged industry volatility. UK manufacturing production’s 1969—2020 average of 0.42% was exceeded by far in April of this year with an all-time low of -28.40%. The last statistics in June indicate a fall of 14.6% in comparison to the previous year, but the forecasts seem to be more positive for the following 12-month period.

The Most Traded Pairs

GBP/USD

GDP/USD or the cable is probably the most frequent currency pair traded that, like EUR/GBP, has a lot of volume with an estimated 15% of the total daily volume of forex transactions. As it comprises two of the most traded currencies in the world, the focus of attention is often pointed towards this particular cross. This week’s economic calendar is rather quiet and the chart below reveals a continuation of a bullish pattern. Nonetheless, with the Brexit talks ever-present, the pair could overall entail slightly more volatility than usual.

GBP/EUR

These two major currencies rank as one of the top eight most frequently traded currencies in the world. From the perspective of daily forex volume, the EUR is second only to the USD, with a market share of 39.1%, whereas the GBP ranks fourth with a 12.9% market share. This currency pair is said to be significantly less volatile than other EUR- or GBP-based crosses due to the economic closeness and interdependence between them. Nonetheless, the (ongoing) changes in monetary policy between the central banks of the UK and Europe can make this pair highly sensitive.

GBP/JPY

The GBP/JPY currency pair is said to be quite a volatile pair. As a low yielding currency, the JPY is commonly used as a funding currency of trade. Therefore, since the GBP belongs to one of the biggest economies in EUT, this particular pair can reveal the state of the global economy. It also reveals risk-off moves in the market resulting in the development of strong trends exceeding thousands of pips.

GBP/CHF

The lower volatility of the pair is said to originate from the economic and geographic proximity of the two nations with both the GBP and CHF used as reserve currencies around the globe. This pair along with the ones mentioned above fall under the more liquid group of pairs, whereas outside this particular set, one can find some more exotic crosses.

GPB/AUD

This currency pair reveals a lot of big moves that signal a much lower value of 100 pips than in pairs such as NZD.JPY for example, where 100 pips would equal a 1.3% move. In this currency pair, however, the same number of pips would turn out to be only a 0.5% move up or down. The percentage return will demonstrate the amount that a trader can expect to get. A number of GBP crosses typically entail many pip moves and, whenever the GBP is traded, smaller position sizes are to be expected owing to the fact that the base currency is as high.

Interest Rates

The GBP is generally believed to be doing better than the USD or JPY similar to other risk-on European currencies. Compared to other central banks, the Bank of England’s current 0.10% does reveal it to be one of the lower interest rates on the spectrum. At the same time, the current interest rate of the United Kingdom poses as a record low in the 1971—2020 average of 7.36%.

Trade Deficit

Like the US, the UK imports more than it exports which leads to large trade deficits with foreign countries. In April of 2020, the total trade deficit of goods and services, without non-monetary gold and other precious metals, dropped down to 7.4 billion GBP in the past 12 months, with imports falling by 34.6 billion GBP and exports falling by 7.8 billion GBP. The total trade deficit for March 2020 was revised up by £2.7 billion to £4.0 billion, driven by a £2.2 billion downwards revision to services imports. These revisions also include the impact of the adjustments of GDP balancing applied to component series (including trade) to improve the alignment of the quarterly GDP position. The overall changes in the trade of the United Kingdom are presented in the image below and were certainly impacted by the strained relations with the EU and the overall state of the global trade under COVID-19.

Economic Activity

In order to understand the general state of the economy of the United Kingdom, one should look into the previously discussed GDP reports as well as FTSE (Financial Times Stock Exchange). FTSE 100 is the index of the 100 companies listed on the London Stock Exchange that will generate insight into the UK’s stock market. The chart below is an example of how the set of indices can provide market participants with information on the performance of the UK equity market. The current situation seems to have improved since the major drop in March of this year, but the likelihood of the return to the pre-pandemic state is still questionable.

Brexit

When Britain voted to leave the European Union in 2016, its currency plunged on world markets and 2020 still offers no actual resolution. The UK has officially rejected the notion of extending the transition period until December 31, 2020. After the video conference between UK PM Boris Johnson, European Commission President Ursula von der Leyen, and European Council President Charles Michel, both the UK and the EU came to terms with having more negotiations in the summer months so as to come to an agreement ahead of the EU summit on October of the same year. With both sides showing a willingness to mitigate the tension, the EUR/GBP currency pair seems to be caught in between the risk sentiment and Brexit. GBP improves along with the improvement of risk sentiment, yet the lack of Brexit progress drags the currency in the other direction.

The various currency pair charts above reveal the progression of the GDP across the years. It appears that the UK’s official currency has suffered quite a lot in the past few years. Upon the 2016 referendum, the GBP fell 8% against the USD and 6% against the EUR. The initial hopes of a weaker currency to increase exports and raise demand for the UK goods/services did come through to a certain degree, but the trade deficit is still very much present. The exports have been increased by the weaker GBP and the unexpected increase in import prices has led to a reduction in pay and, therefore, a drop in consumer demand. Some predictions of the future of the British pound are quite gloomy as some economists believe that the GBP could drop to the 1.10—1.19 USD range should the UK leave the EU without a deal.

Furthermore, without the trade agreement, the economy could shrink by 8%, which would lead to an employment crisis. The overall implications of the unresolved relationship challenges between the UK and the EU are already vivid; for example, after the Brexit referendum, the Dow Jones decreased 600 points, removing $2 trillion from the global markets. A sharp increase in the USD versus a weakened GBP and EUR could obstruct US exports, causing difficulty in the US manufacturing sector, already encumbered by the trade war with China. Apart from the US, the JPY was also feared to experience a major surge in value due to investors’ tendency to flock to domestic currency.

The past December election in the UK was believed to be able to bring some relief, yet 2020 witnessed more negotiations and equally unresolved questions. The possibility of coming to a mutually beneficial deal (termed soft-Brexit in the media) may help the GBP surge in the following months. The currency market is expected to remain unpredictable until the resolution of current matters and the economy was publicly described as high risk by Governor Andrew Bailey himself. The long-term consequences of the UK leaving the EU are largely unknown, very much like the realization of the Brexit supporters’ hopes of economic growth and the pound’s appreciation.

The UK appears to be putting extra efforts in maintaining and preserving the economy, especially with the support of 300 billion GBP of quantitative easing. Combined with the COVID-19 pandemic, the UK’s Brexit struggles seem to be magnified despite the country’s attempts to keep the economy under control.

2007 Financial Crisis

The British economy was said to have been booming with UK tourists visiting the US and the financial sector enjoying the golden days before the financial crisis of 2007. The GBP soared from 2002’s 1.40 up to 2.10 USD in October of 2007, when it decreased by 35% to 1.40 USD at the beginning of 2009. The United Kingdom is believed to have been affected by the crisis more than other countries due to several factors: without a big manufacturing base, the economy depended on financial services, real estate, and retail sales for development. The growth was not based on strong grounds and it heavily relied on credit borrowing/lending.

The bubble burst in 2007 and once the housing prices dropped and credit sources dried up, the economy of the United Kingdom was left in dire straits. The impact of the 2007 crisis would remain long-felt with numerous consequences. The moment the big banks understood what was happening, bank-to-bank lending was reduced immediately.

The number of financial institutions that would still borrow discovered that the interbank lending interest rate doubled and the credit ensuring costs increased as well. Once the lending ceased, the effects were already felt across all sectors and especially in the housing industry. The FTSE 100 dropped by 5.5% in January 2008, which was perceived as the greatest loss since the crash of 2001. Soon people found it difficult to pay mortgages, resulting in fewer retail sales. Cutbacks in housing and retail sales were followed by a number of redundancies and unemployment was staggeringly high.

All of the events further aggravated the already weekend UK economy. With such a vast number of people unemployed, there was a decrease in tax revenue and the downturn continued with the fourth consecutive quarterly drop of GDP at the end of 2008.
In the hope of jump-starting the economy, the UK government reduced the VAT rate, but the effects of the crises were already too severe. The 31.3% FTSE decrease in 2009 was the biggest annual drop since 1984 and the economy just kept shrinking. The financial crisis caused a global recession with many assuming that it resulted from the recklessness of bankers.

The UK’s GDP fell more during the 1930s’ Great Depression and the GBP overall experienced elevated volatility during the entire period of the crisis. The GBP/USD hit a 26-year high in 2007 and the pound kept revealing difficulties in equities and the banking industry. Soon after, in January of 2009, the GBP market hit a 24-year low against the USD, repeating a similar scenario to the one with the EUR in 2008.

Conclusion

With the virus spreading across China in December and January, most UK businesses seemed to be preoccupied with Brexit. The ramifications of these external factors are yet to be seen, but one may see the current GBP struggles as part of its long-lived pattern. The Bank of England has once again stepped in to help the troubled economy and the benefits of those steps are already noticeable. The pound has indeed lost its safety position, placed somewhat in the middle. The currency tends to appreciate more during an economic expansion, so we have yet to see some major moves as the UK’s economy further stabilizes.

The negative impact of Brexit on the GBP has been extensively documented over the past years, but considering the current selloff, one cannot but recall a previous episode of intense Sterling selling: the financial crisis. Investors seem to be fearful of the GBP difficulties and history seems to be repeating. The UK’s deficit is masked by a secure flow of investor capital, which in turn maintains the value of GBP above where it would be if it only reflected imports/exports. The pound largely struggled towards the beginning of the month of August, with the number of virus-inflicted patients rising across the country.

The global economy also went through a difficult period, but the GBP experienced some bigger moves against the USD, returning to 1.30. Looking throughout August, the final resolution of Brexit is still far ahead and the expectations of a new trade deal between the UK and the EU keep the tension up. Aside from the Brexit-related challenges, the virus pandemic also affected the currency market, making it even more unpredictable. August is witnessing the release of several important reports (GBP already came out a few days ago) and traders should pay attention to market volatility and adjust position sizing accordingly. At 1.31 USD, the GBP stands firm ahead of new Brexit negotiations.

Policymakers are said to be meeting soon to discuss the relationship between London’s financial sector and the EU market. The past weekend economy was predicted to be soon seeing a rapid recovery from the impact of the virus on consumer spending. Last, the British pound is estimated to be trading at 1.30 by the end of this quarter and at 1.28 in the upcoming 12 months.

Tags British Pound, Forex Currencies, GBP

Forex Fundamental Analysis

GBP/NZD Global Macro Analysis – Part 1 & 2

Post author By Reddy Shyam Shankar
Post date 18 January, 2021
No Comments on GBP/NZD Global Macro Analysis – Part 1 & 2

Introduction In this analysis, we will analyze endogenous factors that influence both the UK and New Zealand economies. The analysis will also include exogenous factors that impact the exchange rate between the GBP and the NZD. Ranking Scale We’ll rank the endogenous and exogenous factors on a scale from -10 to +10. The score of […]

Introduction

In this analysis, we will analyze endogenous factors that influence both the UK and New Zealand economies. The analysis will also include exogenous factors that impact the exchange rate between the GBP and the NZD.

Ranking Scale

We’ll rank the endogenous and exogenous factors on a scale from -10 to +10.

The score of the endogenous factors will be determined from correlation analysis between the GDP growth rate. If the score is negative, the endogenous factor had a devaluing effect on the domestic currency. Conversely, if the score is positive, the factor led to the appreciation of the domestic currency.

Similarly, we’ll do a correlation analysis between the exogenous factors and the GBP/NZD exchange rate. If the correlation is negative, the factor results in a drop in the exchange rate. If positive, then the exogenous factor increases the exchange rate.

Summary – GBP Endogenous Analysis

A -15 score on Pound’s Endogenous Analysis indicates that this currency has depreciated since the beginning of 2020.

Summary – NZD Endogenous Analysis

A positive 5 indicates that the New Zealand dollar has appreciated since the beginning of this year.

Indicator	Score	Total	State	Comment
New Zealand Employment Rate	-7	10	66.4% in Q3 2020	The NZ labor market is yet to recover from the economic disruptions of the pandemic
New Zealand Core Consumer Prices	1	10	1054 points in Q3 2020	From Q1 to Q3, inflation has increased by 1 point
New Zealand Industrial Production	5	10	A 3.1% increase in Q3	The NZ industrial sector is rebounding from a 12.1% drop in Q2.
New Zealand Business Confidence	7	10	Was 9.4 in November	November showed the first positive reading in ANZ business confidence since August 2018
New Zealand Consumer Spending	5	10	Q3 spending was 41.335 billion NZD.	Q3 consumer spending was the highest recorded in 2020. This shows that the domestic demand has recovered beyond the pre-pandemic period
New Zealand Construction Output	-4	10	Q2 output dropped by 24.2%	The worst decline in construction output in about 18 years. It’s bound to increase as COVID-19 restrictions ease
New Zealand Government Budget Value	-2	10	2020 projected deficit of 4.5 billion NZD	This would be a drop from a surplus of 7.5 billion NZD in 2019. Attributed to the increase in government spending during the pandemic
TOTAL SCORE	5

New Zealand Employment Rate

The employment rate shows the growth in New Zealand’s labor market. The change in the labor market shows how the economy is performing – especially in the coronavirus pandemic. The labor market shows if the economy is churning out new jobs or if jobs are lost. Thus, the growth of the labor market is a leading indicator of economic growth.

In Q3 2020, New Zealand’s employment rate dropped to 66.4% from 67.1% in Q2 and 67.7% in Q1. This shows that the labor market is yet to recover from the economic shocks of the pandemic. The New Zealand employment rate has a score of -7.

New Zealand Core Consumer Prices

This indicator samples the price changes in a basket of the most commonly purchased goods and services by households. The price changes represent the rate of inflation in the overall economy. Note that the computation of the core consumer prices excludes goods and services whose prices tend to be volatile. It helps avoid seasonal distortions in the index.

In Q3 of 2020, the core consumer prices in New Zealand rose to 1054 points from 1048 in Q2. The index had only increased by 1 point in 2020. Thus, we assign a score of 1.

New Zealand Industrial Production

Industrial production in New Zealand refers to the YoY change in total manufacturing sales. It measures the YoY change in sales volume in the manufacturing sector. A survey of 13 industries across the manufacturing sector is surveyed to derive the YoY manufacturing sales data for the whole sector. Some of these industries include; petroleum and coal products, metal products, machinery, equipment and furniture, and food and beverage. Naturally, expansion in industrial production corresponds to the expansion of the economy.

New Zealand manufacturing sales rose by 3.1% in Q3 2020 from a drop of 12.1%. This is the largest YoY increase in manufacturing sales in three years. It shows that the economy is rebounding. We assign a score of 5.

New Zealand Business Confidence

NZ business confidence is a survey of about 700 businesses. They are polled to establish their expectations about the future business operating environment and economic growth in general. Some aspects surveyed include; activity outlook, employment prospects, capacity utilization, and investment decisions.

In December 2020, the NZ ANZ business confidence rose to 9.4 from -6.9 in November. This shows an increased optimism in NZ businesses since it is the first positive reading since August 2018. Thus, we assign a score of 7.

New Zealand Consumer Spending

This measures the value of the quarterly consumer expenditure in NZ. Changes in consumer expenditure go hand in hand with domestic demand changes in the economy, which drive GDP growth.

In Q3 2020, the NZ consumer spending increased to NZD 41.335 billion from NZD 35.197 billion in Q2. More so, the Q3 consumer spending is more than the NZD 40.04 billion recorded in Q1. Consequently, the NZ consumer spending has a score of 5.

New Zealand Construction Output

This indicator shows the overall change in the value of all construction work done by contractors in NZ. It compares the YoY quarterly change, which helps to show if the economy is expanding or contracting.

In Q2 2020, the NZ construction output dropped by 24.2% compared to the 4.1% drop in Q2. This is the worst drop in over 18 years. Thus, we assign a score of -4.

New Zealand Government Budget Value

This is the difference between the revenues that the NZ government collects and the amount it spends. Deficits arise if the revenues are less than expenditures, while surplus occurs when the revenues exceed expenditure.

In 2019, the NZ government had a budget surplus of NZD 7.5 billion. In 2020, it was projected that the budget would hit a deficit of NZD 4.5 billion. This is due to increased government expenditure to alleviate the pandemic’s economic shocks while revenues have been depressed due to nationwide shutdowns. Thus, we assign a score of -2.

For the exogenous analysis of both of these currencies, you can check our very next article. In case of any queries, let us know in the comments below. Cheers.

Tags British Pound, Education, Forex, Forex Fundamental Analysis, Forex Trading, Fundamental Analysis, GBP, Macro Analysis, Macro Economics, New Zealand Dollar, NZD, trading

Forex Fundamental Analysis

GBP/JPY Global Macro Analysis – Part 1

Post author By Reddy Shyam Shankar
Post date 13 January, 2021
No Comments on GBP/JPY Global Macro Analysis – Part 1

Introduction

The GBP/JPY pair’s global macro analysis interrogates the endogenous factors that drive the GDP growth in the UK and Japan. The analysis will also cover exogenous factors that affect the exchange rate between the GBP and the JPY.

Ranking Scale

The analysis will use a sliding scale from -10 to +10 to rank the endogenous and exogenous factors’ impact. Endogenous factors impact the value of the domestic currency. Thus, when it is negative, it means that the domestic currency has depreciated. When positive, it means that the domestic currency has increased in value during the period under review. The ranking of the endogenous factors is based on correlation analysis with the domestic GDP.

On the other hand, a positive ranking for the exogenous factors means that the GBP/JPY pair’s price will increase. Conversely, when negative, it means that the price of the pair will drop. This ranking is derived from correlation analysis between the exogenous factors and the GBP/JPY exchange rate fluctuation.

GBP Endogenous Analysis – Summary

A score of -15 implies that GBP has depreciated since the beginning of this year.

Indicator	Score	Total	State	Comment
UK Employment Rate	-5	10	75.2% in September 2020	Dropped by 1.4% from January to September. The labor market has shed around 551,000 jobs
UK Core Consumer Prices	2	10	109.82 points in November 2020	The UK core consumer prices have increased by 1.82 points since January. Shows that the demand in the domestic economy has not been depressed
UK Factory Orders	3	10	Was -25 in November	The CBI trends orders are improving. The -25 recorded in November was the highest since February
UK Business Confidence	-2	10	Neutral in Q4 of 2020	UK businesses are still pessimistic about the future operating environment.
UK Consumer Spending	-5	10	Was £304.5 billion in Q3 2020	Q3 household expenditure shows domestic demand is recovering from the lows of Q2. Consumer spending is still below the pre-pandemic Q1 levels
UK Construction Output	-2	10	YoY drop of 7.5% in October 2020	The construction output is improving, which implies that the UK economy is steadily recovering from the economic disruptions of the pandemic
UK Government Budget Value	-6	10	UK public sector net borrowing deficit was £22.3 billion	The growing budget deficit is a result of increased government expenditure in the wake of COVID-19 pandemic. Also worsened by reduced revenues due to business disruption
TOTAL SCORE	-15

United Kingdom Employment Rate

The employment rate shows the percentage of the UK labor market that is actively and gainfully employed. It is a comprehensive representation of the growth in the labor market. Note that the changes in the employment rate measure the changes in the economic activities of a country.

In September 2020, the UK employment rate dropped to 75.2% from 75.3% in August. From January to September 2020, the employment rate has dropped by 1.4%, equivalent to about 551,000 job loss. The UK employment rate scores -5.

United Kingdom Core Consumer Prices

This index measures the change in the rate of inflation in the UK by tracking price changes of specific consumer products. The index calculation excludes items whose prices tend to be highly volatile, such as fuel and energy.

In November 2020, the core consumer prices in the UK dropped to 109.82 from 109.9 in October. The index has increased by 1.82 points since January. The UK core consumer prices score 2.

United Kingdom Factory Orders

In the UK, the CBI Industrial Trends Orders tracks orders from about 500 companies in 38 sectors of the manufacturing industry. The survey’s components include domestic goods orders, exports, inventory, output prices, and expectations of future investments and output levels. The surveyed manufacturers respond whether the current conditions are normal, above, or below normal. This is used as a leading indicator of industrial production.

In December 2020, the UK CBI trends orders were -25, 15 points up from -40 in November. This is the highest level since February 2020 but still lower than -18 in January. We assign a score of 3.

United Kingdom Business Confidence

This index gauges the optimism of businesses operating in the UK. A survey is conducted on 400 small, medium, and large companies to determine their optimism. The survey covers exports, output levels and prices, capacity, order books, inventory, competitiveness in the domestic market, innovation, and training. The business sentiment is then ranked from -100 to +100, with 0 showing neutrality.

In the fourth quarter of 2020, the UK business confidence was neutral at 0, a slight change from -1 in Q3. It is, however, still below the 23 recorded in Q1. We assign a score of -2.

United Kingdom Consumer Spending

Expenditure by households contributes to a significant proportion of the domestic GDP. In the UK, this index tracks quarterly changes in the amount of money spent by households and Non-profit institutions serving households (NPISH). Note that when the economy is performing well, consumer spending is high. Conversely, a poorly performing economy corresponds to low consumer spending.

In Q3 2020, consumer spending in the UK rose to £304.5 billion from £258.3 billion in Q2. However, the Q3 expenditure is still lower than Q1. The UK consumer spending scores -5.

United Kingdom Construction Output

This economic indicator tracks the yearly change in the value of work done in the construction sector. The amount of money charged by construction companies in the UK is based on a sample of 8000 companies that employ over 100 employees. Note that in the UK, the construction sector contributes about 6.4% of the GDP.

In October 2020, the UK’s YoY construction output dropped by 7.5%, up for the 10% drop recorded in September. This marks the smallest decrease in the UK’s construction output since the pre-pandemic period. We assign a score of -2.

United Kingdom Government Budget Value

This indicator tracks the changes between the government’s revenues and expenditure. When the revenue exceeds the expenditure, it is a surplus and indicates that the economy is expanding. When the deficit is increasing, it means that the government is spending much more than it receives. This poses a threat of overburdening the economy with future debt repayment obligations.

In October 2020, the UK public sector net borrowing deficit was £22.3 billion. This is an improvement from the deficit of £28.6 billion in September. In January 2020, the UK had a surplus of £9.6 billion. Thus, we assign a score of -6.

In the next article, we have discussed the endogenous analysis of JPY currency to see how it has performed in the year’s due course. Make sure to check that out. Cheers.

Tags British Pound, Education, Forex, Forex Trading, Fundamental Analysis, GBP, GBP Endogenous Analysis, GBP/JPY, JPY, Ranking Scale, trading

Forex Assets

Shocking Facts About the GBP/USD Currency Pair

Post author By Forex Academy
Post date 11 November, 2020
No Comments on Shocking Facts About the GBP/USD Currency Pair

The UK and the USA always had a great relationship and similar economic views. Combining the British and American does not come out as great according to certain technical prop traders. The GBP/USD pair has some special characteristics as the third most traded currency pair. Being a very popular trading choice is not a reason […]

According to our prop trader, GBP/USD has some nuances trend following systems might have trouble with. We will focus our attention on the basic things to know about GBP/USD trading based on some very different opinions by traders, why to pay attention to additional factors on this pair, and certain trading measures.

GBP/USD has a lot of similarities to the EUR/USD currency pair which is the worst pair you can trade described in our previous articles, according to technical traders’ opinion. Beginners should avoid the EUR/USD pair – this is certainly the opposite of what you would otherwise hear on the internet or trading books. If you are not familiar with the contrarian trader view, this is the asset most people are trading and where the big banks intervene frequently. What is even more surprising is some traders just trade this currency pair even if it does not have special advantages, the liquidity or spreads should not be a really important benefit. If we compare the two pairs we can notice they are in the top 3 most traded pairs, and both have the USD counter currency.

The USD is the most manipulated currency yet the GBP is not far behind, it is one of the largest currency trading countries in the world after all. GBP/USD is also more volatile than the EUR/USD. Volatility is not always a bad thing, except for the scalping strategies, trend following strategies need volatility actually. Strategies, as explained in our previous articles, are volatility adaptive, making them universal to any asset. Another key characteristic for both currency pairs is USD driving the bus. In other words, the percentage change in the price or the pair is caused by the USD movements for the most part. Experienced traders know these pairs do not offer much for diversification, it is like trading the USD alone and the USD is the playground of the big banks and news events.

About volatility, the GPB pairs are generally the most volatile if we do not count some exotics. Having a system that adapts your position sizing and protective orders accordingly to the volatility of any pair clears the risks related to it. However, expect bigger moves from GBP/USD than with EUR/USD. Interestingly, GBP/USD is also more sensitive to the news events according to measurements. Since the USD is included, events are frequent. Now, some events are more important and we are not talking just about the impact levels marked on calendars, but about the measurements each event caused the currency to move a lot. The measurements like this are not very popular, they are offered on some statistical websites for a fee, but are easily found.

You may notice if you are trading on a daily timeframe, some events are not meaningful even when regarded as highly important on calendars. As a trader, you will have to adapt your trading plans for the GBP/USD since it has peculiarities. Our technical prop traders avoid news events, so unless you have consistent results from trading the news we recommend avoiding them too, you have no control over how they are going to affect the price. Know that except for the USD, the pound is the most sensitive currency to news events. The reason comes from news aware, educated traders that react.

Since the GBP/USD has this combo of a big mover with news event sensitivity, traders should trade this pair as they would the EUR/USD. It becomes a pair that comes after all other signals. In other words, if you have a signal from your system on EUR/GBP, and GBP/USD, do not split the position risk, trade the EUR/GBP, and ignore GBP/USD. The nature of GBP/USD increases the risk you cannot avoid if you trade it. Our articles cover some of the crosses not involving the USD so you may consult them for specialties on these currency pairs. If a system shows only the signal on GBP/USD, trade it but with reduced position size, as our prop trader recommends.

Brexit poses a special uncertainty for the GBP, consequently also on the GBP/USD. Interestingly, EUR/GBP is still a good choice, but the GBP/USD does not follow the same system-friendly moves. Trends here are choppy, whipsaws often, and unpredictable effects ruin what you might have gained before. The events from Brexit come out of nowhere, a speech or announcements by the banks or political tensions hits the price action line like a stone drop. In 2019 the forex was pretty flat. To some opinions, the Brexit caused some much-needed volatility, allowing for trend following systems to re-engage trading, at least with reduced risk settings.

Nevertheless, caution requires us to follow the events and portals we usually do not have to if you follow our trading strategy example, also pay attention to other markets in the UK and the USA. The Brexit could be over in 2020, however, the effects and lessons from it should remain in the traders’ heads. Every country experiencing any similar long term, eventful turmoil causes the country currency value erratic. Whatsmore, the COVID-19 implications on the GBP are even more severe than in the USA if we look at the economic and pandemic measures.

When we try to make predictions, we are dealing with a very low probability we are correct. Traders that use technical trading systems do not like to predict price movements, especially not in the long term. Investors rely heavily on the fundamental analysis and they commonly make predictions based on the data, yet they react only when the results of Brexit or COVID-19 are clear. Right now the markets have multiple factors – COVID-19, Global trade war tensions and measures, very low maneuverability space left for the central banks, and an economic wave on the decline, signaling another world economic crisis. Markets never had all these very important factors at the same time which is not clearly evident on the charts. At the moment of writing this article, equities are near the record high like nothing is going on.

The selloff on a larger scale in the equities and risk-on currencies are now very easy to trigger, posing a great opportunity for cautious forex traders. GBP is considered a mix between risk-on and risk-off currency, but nowadays a rare choice in a risk-off environment, while the USD is a risk-off currency facing presidential elections and pandemic effect. Some traders think the GBP has priced in for the worst-case Brexit scenario, the one without the agreement with the EU. This means the GBP is about to reverse but the recent COVID-19 events caused uncertainty to the point the price is actually at the right level.

Consequently, the forex market is a bit low on volatility, as well as the equities, as before the storm. The US presidential elections are on the way making 2020 one of the most interesting years for analysis. The EUR has not priced in for Brexit, investors seem not to care about the UK-EU relations and focus on the internal struggles of the Union. The EU is facing serious doubt in the pillars that hold it together, this was especially evident during the COVID-19 pandemic where every country fought for medical supplies over other EU members.

All things considered, technical traders do not make decisions based on these fundamental events but react only when the move on the market actually happens. However, there is an indirect pre-reaction. To conclude, GBP/USD is a more volatile version of the EUR/USD and with more news events, traders adjust their risk management accordingly. On the other hand, GBP cross pairs are great movers with quality trends. Additionally, Brexit and other major factors need to be considered and avoided, trade the GBP/USD only If there is nothing else to trade and do it with half risk. If you test your systems on this particular pair, compare the results with other GBP pairs. Systems that generate good results on EUR/USD and GBP/USD for a longer period could be worth keeping and perfecting.

Tags British Pound, Currency pairs, GBP-USD, US Dollar

Forex Assets

Australian Dollar, Pound, and South African Rand: Three Fashionable Currencies

Post author By Forex Academy
Post date 5 October, 2020
No Comments on Australian Dollar, Pound, and South African Rand: Three Fashionable Currencies

Today we will examine three currencies and four markets (EUR/GBP, GBP/USD, AUD/USD, USD/ZAR) so that you know the latest developments that need to be known and that affect those currencies. The pound sterling has long been a good barometer of geopolitical tensions between the United Kingdom and the European Union, and now more than ever […]

Today we will examine three currencies and four markets (EUR/GBP, GBP/USD, AUD/USD, USD/ZAR) so that you know the latest developments that need to be known and that affect those currencies.

The pound sterling has long been a good barometer of geopolitical tensions between the United Kingdom and the European Union, and now more than ever when Boris Johnson threatens without being a bluff to derail the negotiations.

The Sterling has long been a good barometer of geopolitical tensions between the United Kingdom and the European Union. After seeing what happened in the last few days, everything points to the potential risk of the negotiations breaking down. But there is a halo of hope, the past. Yes, you can remember perfectly well how whenever both sides were about to throw everything overboard, always, at the last moment, it was redirected.

Why wouldn’t it be like this again this time? Why would it not be as if the time limits were finally extended and interest agreements were signed? What is urgently needed is to reach a trade agreement next October to avoid a chaotic exit, bearing in mind that the UK’s current transition period ends at the end of next December.

The pound plummets between 3.2-3.6% against the euro and the dollar and is only 2% of the land originated by the COVID 19 (on March 18 it stood at 1.065). Even on Wall Street, there are voices advocating the fact that the odds of seeing the parity between the British currency and the Community currency have increased (calculations say that the probabilities have increased from 3% to 12% with a view to 3 months and from 11% to 25% with a view to 6 months), a fact that would be historic since it has never happened in history, not even with the holding of the EU exit referendum on 23 June 2016.

Investors who expect a recovery of the pound around 4-5% in the next 6 months are paying even 30% less than those who are leaning towards more weakness in the pound. One more fact that reveals what I just told you, that the market believes that both parties, as always, are using orthodagos and will finally reach some kind of agreement as always. Investors who expect a recovery of the pound around 4-5% in the next 6 months are paying even 30% less than those who are leaning towards more weakness in the pound.

The point is that a weak pound favours UK exporting companies, on the other hand, we have that the country’s imports would be more expensive.

* EUR/GBP: since last June this market was lateral and quiet, but since 3 September it is rising with joy. If the cuts bring the price down to 0.8877, it could be an opportunity to look there for an upward rebound.

* GBP/USD: since March the rise of this market is brilliant. But this month it reached its strongest resistance that was formed in March 2019 and then successfully tested in December of the same year. Once again, she has not been able to cope with it, and as always she touches it, falls come. Thus, breaking the resistance of 1.3383 implies the option of looking for more climbs.

Pound, Australian Dollar, South African Rand, Three Currencies in the Eye of the Hurricane
– The Central Bank of Australia comments that the strength of the Australian dollar is due, among other reasons, to the increase in commodity prices, especially iron prices, at the same time the entity did not offer any clues reflecting the implementation of additional monetary measures.

The strength of the Australian dollar is due, among other reasons.

The Bank announced the expansion of lending to entities and gross domestic product contracted more than ever in the last quarter, officially pushing Australia into its first recession in nearly three decades. The Australian dollar has revalued more than 26% since its low of 19 March, when the Central Bank announced emergency measures that included lowering the interest rate to 0.25%.

* Aud/Usd: Investors who are very aggressive will likely bounce upwards in the 0.7214 zone.

– The South African rand is testing a key level. It is the currency of the emerging market with the best performance this September only behind the peso of Mexico and the real of Brazil, due to speculation that the record cycle of monetary policies of the Reserve Bank of South Africa may be coming to an end.

As the Federal Reserve is likely to keep interest rates low in the future, the South African currency may continue to attract demand from investors borrowing dollars to buy higher-yielding currencies, known as carry trade (a fact that has generated in September a profit of +4%).

Tags Australian Dollar, British Pound, South African Rand

Forex Assets

Trading The ‘GBP/BRL’ Exotic Pair & Comprehending The Costs Involved

Post author By Reddy Shyam Shankar
Post date 4 May, 2020
No Comments on Trading The ‘GBP/BRL’ Exotic Pair & Comprehending The Costs Involved

Introduction

GBP/BRL is the abbreviation for the Pound sterling against the Brazilian real. As we know, GBP is the official currency of the United Kingdom, Jersey, Guernsey, and others, whereas BRL is the official currency of Brazil. In Forex trading, currencies are always traded in pairs. The primary currency in the pair is known as the base currency, while the second one is the quote currency.

Understanding GBP/BRL

To find the relative value of one currency, we compare that with another currency in the Forex market. The market value of GBP/BRL helps us to understand the strength of BRL against the GBP. If the exchange rate of the pair GBP/BRL is 6.5415. It means that to buy 1 GBP, we need 6.5415 BRL.

Spread

Forex brokers have two prices for currency pairs. They are the bid and ask prices. The difference between this bid and the ask prices is known as the spread, and this is how Forex brokers profit for the services they provide. Some brokers include the costs in the buy and sell prices of the currency pairs instead of charging spreads. Below are the ECN and STP spread values for the pair GBP/BRL.

ECN: 41 pips | STP: 44 pips

Fees

A Fee is a commission we pay to the broker for executing our trades. It differs for different types of brokers. For instance, there is no fee charged by the STP brokers, but for ECN accounts, a few pips are charged a fee.

Slippage

It is the difference between the expected price and the price at which the trade gets executed. Slippage can occur at any time, but it mostly happens when the market is highly volatile.

Trading Range in GBP/BRL

Being aware of the volatility of a particular currency pair before placing the trade is very important for every aspiring trader. The trading range here is useful to measure the volatility of the GBP/BRL pair. The amount of money we will win or lose in a given amount of time can be assessed using the below trading range table.

Procedure to assess Pip Ranges

Add the Average True Range indicator on your price chart
Then, set the period to one
Add a 200-period Simple Moving Average to the ATR indicator
Shrink the chart to assess a significant period
Select the desired timeframe
Measure the floor level and set this value as the minimum
Measure the level of the 200-period SMA and set this as the average
Measure the peak levels and set this as Max.

GBP/BRL Cost as a Percent of the Trading Range

The cost of trade depends on the broker type and varies based on market volatility. The total cost of trade involves spreads and slippage apart from the trading fee.

ECN Model Account

Spread = 41 | Slippage = 3 |Trading fee = 5

Total cost = Slippage + Spread + Trading Fee = 3 + 41 + 5 = 49

STP Model Account

Spread = 44| Slippage = 3 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 3 + 44 + 0 = 47

Trading the GBP/BRL

There are a few currencies that are hardly traded in the foreign exchange market. These currencies are called exotic-cross currency pairs, and the GBP/BRL is one such exotic pair.

These pairs have less market depth, less volume, and are also illiquid. GBP/BRL is a trending market. Further, the average pip movement on the 1H timeframe is 198 pips, which is considered to be volatile. Higher the volatility, lower is the cost on a trade. However, this should not be considered an advantage as it is risky to trade in highly volatile markets.

Let’s take, for example, in the 4H time frame. The Maximum pip range value is 816, and the minimum is 102. When the comparison of the fees for both the pip movements is made, we find that for 102pip movement, fess is 46.08%. But for the 816pip movement, fess is only 5.76%.

So, we can confirm that the prices are higher for low volatile markets and low for highly volatile markets. We recommend trading when the volatility is around the average values. Experienced traders who strictly follow money management can trade in a highly volatile market.

Tags Asset Analytics, Brazil, Brazilian Real, British Pound, BRL, ECN, Forex, GBP, GBP/BRL, Great Britain Pound, STP, trading

Forex Assets

Exploring The GBP/ILS Forex Exotic Currency Pair

Post author By Reddy Shyam Shankar
Post date 20 April, 2020
No Comments on Exploring The GBP/ILS Forex Exotic Currency Pair

Understanding GBP/ILS

GBP/ILS is the abbreviation for the Pound sterling against the Israeli Shekel. In currency pairs, the first currency GBP here is the base currency and the second currency ILS is the quote currency. In Forex currency pairs, if the value of, let’s say, the base currency goes up, the quote currency’s value will go down and vice versa.

Also, when we buy a currency pair, we buy the base currency and implicitly sell the quote currency. The market value of GBP/ILS determines the strength of ILS against the GBP that can be understood as 1 Pound is equal to how much ILS. So if the conversion rate for the pair GBP/ILS is 4.4725, it means to buy 1 GBP, we need 4.4725 ILS.